Establishing
a bull call spread involves the purchase of a call option on a particular underlying
stock, while simultaneously writing a call option on the same underlying stock
with the same expiration month, at a higher strike price. Both the buy and the
sell sides of this spread are opening transactions, and are always the same
number of contracts.

This
spread is sometimes more broadly categorized as a "vertical spread":
a family of spreads involving options of the same stock, same expiration month,
but different strike prices. They can be created with either all calls or all
puts, and be bullish or bearish. The bull call spread, as any spread, can be
executed as a "unit" in one single transaction, not as separate buy
and sell transactions. For this bullish vertical spread, a bid and offer for
the whole package can be requested through your brokerage firm from an exchange
where the options are listed and traded.

P/L
Profile

Market
Opinion

Moderately
Bullish to Bullish

When
to Use

An investor often employs the bull call
spread in moderately bullish market environments, and wants to capitalize on a
modest advance in price of the underlying stock. If the investor's opinion is
very bullish on a stock, it will generally prove more profitable to make a
simple call purchase.

Risk
Reduction

An
investor will also turn to this spread when there is discomfort with either the
cost of purchasing and holding the long call alone, or with the conviction of
his bullish market opinion.

Benefit

The bull call spread can be considered a double
hedge strategy. The price paid for the call with the lower strike price is
partially offset by the premium received from writing the call with a higher
strike price. Thus, the investor's investment in the long call, and the risk of
losing the entire premium paid for it is reduced, or hedged.

On the other hand, the long call with the
lower strike price caps or hedges the financial risk of the written call with
the higher strike price. If the investor is assigned an exercise notice on the written
call and must sell an equivalent number of underlying shares at the strike
price, those shares can be purchased at a predetermined price by exercising the
purchased call with the lower strike price. As a trade-off for the hedge it
offers, this written call limits the potential maximum profit for the strategy.

Risk
vs. Reward

Maximum loss for this spread will generally
occur as the underlying stock price declines below the lower strike price. If
both options expire out-of-the-money with no value, the entire net debit paid
for the spread will be lost.

The reward is that the bull call spread
tends to be profitable when the underlying stock increases in price. It can be
established in one transaction, but always at a debit (net cash outflow). The
call with the lower strike price will always be purchased at a price greater
than the offsetting premium received from writing the call with the higher
strike price.

Net
Upside

Upside
Maximum Profit: Limited

Difference
Between Strike Prices minus Net Debit Paid

Net
Downside

If
the stock price declines at expiration, a loss will occur. However, maximum
loss will not be more than the original debit.

Break-Even-Point

Strike
price of purchased call plus net premium paid

Volatility

The effect of an increase or decrease in
the volatility of the underlying stock may be noticed in the time value portion
of the options' premiums. The net effect on the strategy will depend on whether
the long and/or short options are in-the-money or out-of-the-money, and the
time remaining until expiration.

Time
Decay

The effect of time decay on this strategy
varies with the underlying stock's price level in relation to the strike prices
of the long and short options. If the stock price is midway between the strike
prices, the effect can be minimal. If the stock price is closer to the lower
strike price of the long call, losses generally increase at a faster rate as
time passes. Alternatively, if the underlying stock price is closer to the
higher strike price of the written call, profits generally increase at a faster
rate as time passes.

Alternatives
before expiration

A
bull call spread purchased as a unit for a net debit in one transaction can be
sold as a unit in one transaction in the options marketplace for a credit, if
it has value. This is generally the manner in which investors close out a
spread before its options expire, in order to stem a loss or realize profit.

Alternatives
at expiration

If
both options have value, investors will generally close out a spread in the
marketplace as the options expire. This will be less expensive than incurring
the commissions and transaction costs from a transfer of stock resulting from
either an exercise of and/or an assignment on the calls. If only the purchased
call is in-the-money as it expires, the investor can either sell it in the
marketplace if it has value or exercise the call and purchase an equivalent
number of shares. In either of these cases, the transaction(s) must occur
before the close of the market on the options' last trading day.

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